Building Infill Homes with Alex Serrato #587

Norris Bruce

Bruce Norris is an active investor, hard money lender, and real estate educator with over 30 years experience. Bruce has been involved in over 2,000 real estate transactions as a buyer, seller, builder and money partner.

Norris Bruce
April 20, 2018
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Bruce Norris is joined this week by Alex Serrato. Alex is a local builder, flipper, and real estate investor. They partnered on quite a number of deals over the last few years and had two homes under construction and two about to start.

Episode Highlights

What is Alex’s process for finding a building lot, and where does he begin?
What about agents who deal with land? Is this their niche?
What are some things Alex looks for in a property that he knows instantly could be a problem?
How is it working with different cities, and are there some he is glad to see lots while others he is not?
Has he ever worked with people who handled their land in a way that the city disapproved?
How does he handle school fees?
Does he work with his same team he started with at the beginning?

Episode Notes

Bruce and Alex have a good partnership. From Bruce’s side, he thought about the luxury he has since Alex does a lot of work he never has to see. Alex will show him a good lot, but Bruce does not get to see all the journey it takes and the number of lots you go through that don’t make the cut. Bruce and Alex began by talking about this process since the Norris Group has investors that will probably start working in construction since it is easier to find a lot that is more profitable than starting with a product that needs fixing. This could include manufactured or stick-built homes.

Bruce asked about the process to find a building lot and where he begins it. Alex said they usually find their land through the multiple listing service. From time to time they will have a referral from somebody who owns a piece of land and thought about building themselves before finding it a challenge. Bruce asked if this lead comes from realtors or from people noticing what he does. Alex said it was the latter and word of mouth.

Bruce asked about agents who deal with land and if this is their niche. Alex said it most likely is a niche and something on which they focus. Bruce next asked how repetitively lot price is so big that there is no way it works. Alex said many times, even up to 85% of the time. The seller wants more than the project will support. You do you due diligence, research, spend hours to days, then find out the conditions or prices set by the county have to be penciled in. You have to figure out how far utilities are overhear or underground and whether you have a sidewalk or curving gutter.

Bruce mentioned a lot that has been for sale in the Piedmont area for twelve years. He drove by the previous day and thought for sure it was built on by now, but it is still vacant. If it doesn’t pencil, what can you do? Alex said there are sellers who will adjust the price to keep up with inflation. With inflation, if it was not affordable then, it won’t be affordable now.

Alex is under negotiation with something that is multiple lots that we have to create. Bruce asked if Alex had to pursue this or if it found him. Alex said he received a phone call from a broker who specialized in land listings and transactions. He called Alex and told him about a wonderful project, and he thought of Bruce first. He has been back and forth with the seller negotiating with him. He walked away from the deal several times, and the seller contacted him to get back to the table and they now have an offer. This is a 5 lot subdivision where the gentleman will carry some paper for a couple years. They will go in with a certain amount down and another chunk of money when he moves out since he is living in a trailer. They will carry the rest of the amount for up to two years at 6% interest.

What was interesting about all this was it was not like it was a fixer-upper that showed up in the MLS and 25 offers showed up within 24 hours. This property is more isolated, and that is usually the preference. Even during times when the broker or realtor will have a pocket listing and they only call you, that is how you have access to some of the inventory that is not listed. Bruce sees how this would be really beneficial with land since you can go down a journey. This is what this is about since you are really trying to help your client understand they need help since they probably don’t know what they are doing. Bruce told Alex if he stood on a lot with him, Alex would know a lot more instantly than Bruce. He would have all these thoughts going off in his mind while Bruce would just be saying how it looked flat enough to him.

Bruce asked what some of the things are Alex sees almost instantly and knows will be a problem. He said the thing he looks for immediately is utilities. He wants to know where your power lines and fire hydrant are and if you have gas or propane. From there, you look to see if there is grating involved and if there are little holes on the ground that show something is burrowing into the property. Are certain trees green while everything else is dry? The list is long, but they become second nature once you start looking at land and doing your research. Bruce asked if there is any education that has been written about this. Alex said he is sure there is somewhere, but he has not come across it.

If it passes the initial inspection where you get on the lot and see you have a shot at it, Bruce wondered what the next step is. Alex said the next step is you can either go to the city or county and start doing your due diligence. A lot of the agencies have a website, so you can log into there and get familiar with it. A lot of times, you can do a lot of research before going to the building department and spending hours waiting your turn without knowing what you are going to ask. Bruce asked Alex if they appreciate when he has already taken care of a lot of this, which he said they do. When you show up there and have the report in front of you and they see you have done your homework, they get very involved and energetic. It is a people business where they know you have done your work, and that makes them more involved and helpful. If you don’t do this, it could be the opposite for them.

Bruce next asked Alex how different cities are to work with and whether he has a city he is glad or sad the lot is there. Alex said there are pros and cons to every city, and they are all wonderful. There are challenges with every city, and you have to get to learn them. Bruce asked how reliable the information is he is getting. For example, when he is talking to somebody he feels is “the” person, do they put it in writing to where he knows they are accurate. Alex said a lot of times you don’t know. You have been told and given information over the counter, but you don’t really know until you have submitted your plans and the plan checker gives you a 20-page report of corrections or conditions. Whatever the conditions are is what you need to get your permit.

There are different plan checkers. These include building and safety, public works, transportation, and a multitude of conditions you have to satisfy. If you think about it, there is a lot of work done in advance of you knowing the score for a specific set of plans for an event. Alex is not interested in closing the lot until after this occurs, but a lot of times the seller will not wait 3-6 months. You have to be sure that lot will satisfy for whatever reason you want. If you want to build, you make sure the soil report is clean and is a place where you can develop. You will find out the rest as you go. Bruce asked Alex if he would buy a lot without a soils report, which he said he would not recommend it. You especially should not if you are unknown to that area and don’t have the information. You would need to know how much of the land to excavate and recompact. At the end of the day, it’s about money.

Bruce next asked if he has ever worked with someone who had a piece of land and touched it in a way the city disapproved of, so they handled the land themselves. Alex said he actually sees this all the time. The property owner would come across some free dirt and take advantage of it. They would then import 2-3,000 cubic yards of dirt and never go through the process. If you buy it, you are now responsible for it. You would have to move all the dirt and recompact it. This could include dirt that should not even be there, so you have to make sure it is not contaminated.

Bruce said as a lender, he does not really get involved until the permit is in place. Bruce asked if this is a good idea. Alex said there is a lot of work to be done before getting through the permits. There might be a new property owner who would enjoy having that loan or money in place. It could be three months or nine months, but during this time there are holding costs. Every month that goes by is a chunk of money, and you could have surprises up until the very end. Every once in a while, they might run into an interesting issue, such as in Norco when they had an issue with the street height. The elevations were off, and this took a few months to resolve.

It took several months for the engineers to redraw the plans and get them resubmitted to the city. They would then need to approve them and get the contractors back out there to do the work. The house was already completed, but what messed things up was the storm gutter was off. They had to demolish the property and start over again. The big issue was not the work itself, but the process. This included getting the surveyors, the engineer, the plans, the plan review time, then actually doing the work. This part actually took a few days. The rest involved the red tape and getting there.

Bruce asked how big a deal it was to have people who were familiar with him trusting he will do good work. Alex said it is monumental and very important you treat people with respect and follow through with what you say you will do. They are in the same boat as you and working for a living. If you do not take care of them or prolong their payment process, you probably won’t see them again and get a bad reputation.

Alex uses repetitive plans. Bruce wondered why he does this and why it is beneficial. Alex said the most important benefit is they buyer’s response and the fact that it is a product you will be able to sell without complications. The feedback you are getting from the buyers is telling Alex it is something he will want to keep building. Second, you know a lot of your inventory and how much it will cost. Everything is going up in price, but at least you have an idea how much it will cost to build the house. Bruce asked if it helps that his subs have done the same house over and over, which he said absolutely. The framers love it. They look at the plans, see that everything is the same, and go at it. Bruce visited one of Alex’s houses that had just been started on, and the roof was already sheeted. Alex said they have trusses, sheathing, and facia all in a few days.

One of the houses Bruce mentioned was going to have work done had been burnt. He heard different versions of what you can do. One is you take down the existing house, leave a wall, and build the same exact house. There are some benefits to this in cost. Bruce asked if there was anything left of the burnt house, which Alex said no. Alex actually had a demo permit and removed the part that was there. There was not much foundation and two walls that were built out of block that did not burn. Bruce asked if this was a drive-by or was listed in the MLS, which Alex said was the former. He called on it, and the seller wanted an enormous amount of money at $260,000. Alex ended up getting it for the low $100s. The seller over-priced it, and the product became stale. It was in the MLS at one point, and a realtor got involved. At first it was only a seller involved who put a For Sale By Owner sign in the front. He wanted an unrealistic amount of money. It took time, but once they got to the correct price it made sense.

Bruce asked Alex about when he is penciling the house and if the cost is different since there was an existing house there at one time. Alex said it is a little bit different in terms of permits, and it varies from city to city. Some cities will give you credit, while other cities won’t. What Alex got credit for on this particular property was if the water and gas meters were in place. He also wants to make sure there is no grading involved. Three of the larger fees are exempt, so this saves you about $25,000. These were already covered since the home had already been built. Bruce wondered if there was a sewer connected, but Alex said it was septic.

Alex next mentioned school fees, which depend on the day and which person you come across. On one property he had a school fee waived, and on another property, they would not waive it. One property on Verda was an existing manufactured home on a single-family lot. It was not burnt, but it was a property Alex rented out until it was profitable to build. Bruce asked Alex what he did with that manufactured home, which he said he demoed it and got rid of it completely after receiving a demo permit. This needed to be done since the home was a disaster.

However, they kept the footprint of the square footage, which was under 1500. They had built similar square footage prior. He went to the school district and explained to them what he was doing. He had a printout of the tax assessors’ square footage verification. He took this with him, which helped since they were able to confirm what was there was similar to what he is going to build as far as square footage goes. This did not have a foundation, but they still passed on the school fees. It’s a hit and miss. There may be a policy, but it could change depending on who discusses it with you. It’s hard to say whether you will get credit for everything mentioned above on a property. It is an unknown factor and all depends on certain other factors.

Alex had just recently put a property in escrow, and on this one they did not have 5 lots yet. Bruce wondered what the journey was here since they also had to deal with the street. There were some circumstances here where it did not have to be paved. In order for the track map to be approve, it has to go through every department, and they will give you a report of conditions. Although this happened in 2006, the owner had been filing extensions and is good until September 2019. Those conditions that are set are conditions that have to be honored. When you look at the street improvements, they are looking at aggregate-based, which is easy work with and acceptable to that area of the homebuyer.

Bruce asked Alex about the team he has for construction and if it is the same team he has had for years. Alex said for the most part yes and that he has had people he uses repetitively. Bruce asked how simple this has made his job, which he said it is wonderful. He knows them, they know him, and they know what they are doing. Bruce wondered what the secret was to creating the team and retaining it since this is really important. Alex said it really comes down to taking care of them and doing what you told them you would do. Make sure you pay them on time and follow through with them if you negotiated a price. They know what to do, and as a builder you do what you are supposed to do. Bruce asked if he sees things picking up, which he said he does. Inspectors he speaks with see it as well. Vendors also see it as well. Bruce wondered if prices of labor are increasing, which Alex said this is something he is not seeing. However, material is going up, specifically roofing material.